Mercury Systems, Inc. — Q1 FY2022 Form 10-Q
Reporting period: First quarter ended October 1, 2021 (13 weeks); comparison is the first quarter ended October 2, 2020. Mercury supplies technology and products to aerospace and defense customers. Results include POC and Pentek, acquired in fiscal 2021; the prior-year comparison does not include either business.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $225.0 million | $205.6 million |
| Gross margin | $88.4 million; 39.3% | $88.1 million; 42.9% |
| Operating income (loss) | $(5.6) million | $18.8 million |
| Net income (loss) | $(7.1) million | $15.8 million |
| Diluted EPS | $(0.13) | $0.29 |
| Adjusted EBITDA (non-GAAP) | $38.3 million | $42.8 million |
| Operating cash flow | $(2.0) million | $22.9 million |
| Free cash flow (non-GAAP) | $(7.4) million | $12.0 million |
Revenue increased 9.4%, but organic revenue declined 10.6% to $183.7 million; acquired revenue was $41.3 million. Gross margin fell 360 basis points, primarily due to program mix, POC’s lower margins and increased customer-funded development work. Operating results also reflected $12.3 million of restructuring and other charges, including 1MPACT costs, and higher acquired-asset amortization. Adjusted EBITDA and other non-GAAP measures are management-defined and should be considered alongside GAAP results.
Liquidity, debt and balance sheet
Cash and cash equivalents were $95.8 million at October 1, down from $113.8 million at fiscal year-end. Long-term debt was $200.0 million, borrowed under a $750.0 million revolving facility maturing in September 2023; $963,000 of letters of credit were also outstanding. The company reported covenant compliance and said available cash, operating cash generation, revolver capacity and financing capabilities should meet anticipated needs for at least 12 months.
Current assets were $661.7 million and current liabilities $167.3 million. Unbilled receivables and costs in excess of billings rose to $194.4 million from $162.9 million. Non-cancelable purchase commitments totaled $154.7 million, all due within one year; operating lease obligations totaled $101.0 million.
Material developments and outlook
- Revenue growth was led by acquired sales and modules and sub-assemblies; organic revenue declined. C4I revenue increased, while radar revenue decreased. Airborne-platform sales rose $29.3 million.
- 1MPACT, announced in August 2021, is a companywide initiative targeting growth, margin expansion and adjusted EBITDA potential over five years. The company recorded $7.3 million of severance charges for eliminating 100 positions and $4.9 million of consulting costs. These are targets, not specific financial guidance.
- Remaining performance obligations were $373.9 million; approximately 69% was expected to be recognized as revenue in the next 12 months.
- Avalex was acquired on November 5, 2021, after quarter-end, for $155 million in cash, subject to working-capital and net-debt adjustments. The purchase-price allocation was not complete at filing.
- Management cited risks including defense funding and order timing, component shortages and production delays, acquisition integration and realization of 1MPACT benefits, fixed-price contract costs, and COVID-related requirements. No material change to previously disclosed risk factors was reported.
- A former sales representative’s arbitration claim seeks approximately $9 million in direct damages, with treble damages requested on some claims. Mercury disputes the claims and intends to defend itself; management did not expect pending matters overall to materially affect financial position, results or cash flows.
Key facts for investors to verify
- How much future revenue growth is organic versus acquired, and whether organic performance improves.
- Whether gross margins recover as acquisition mix and customer-funded development work evolve, and whether 1MPACT delivers its stated objectives.
- Cash conversion and working-capital trends, especially unbilled receivables, inventory and customer advances, alongside the $200 million revolver balance and near-term purchase commitments.
- Avalex’s final purchase-price allocation, integration costs and contribution to results.
- Defense customer concentration: the U.S. Navy, Raytheon Technologies and Lockheed Martin represented 17%, 14% and 13% of revenue, respectively, in the quarter.
- Developments in the ERA arbitration and any material changes to other legal, indemnification or contingent exposures.